June 24, 2014

Tax Cheats Derail Reform in The Bahamas

Leona Helmsley was the billionaire owner of the Empire State building and other lucrative real estate in New York City. But she is best remembered today for her efforts to evade taxes.

When she was convicted of federal income tax evasion and other crimes in 1989, a former housekeeper testified she had heard Helmsley say: "We don't pay taxes. Only the little people pay taxes", a saying that became notorious.

Known as the Queen of Mean in her day, Hemsley served only 18 months in prison due to health concerns, but she spent the rest of her life in isolation. After her death in 2007, most of her huge fortune went to a charitable trust.

In 2009, former US senator Tom Daschle was appointed to a key cabinet post in the new Obama administration. But he withdrew when it became known that he owed more than $100,000 in back taxes, which he subsequently paid with interest.

According to White House Press Secretary Robert Gibbs, Daschle recognized that "you can't set an example of responsibility but accept a different standard."

Contrast what happened to these high profile cheats in the US (and there are many other examples) with what has happened in the Bahamas recently as the government seeks to implement tax reform.

Earlier this year, it was revealed that Ishmael Lightbourne, the government's chief tax spokesman, had not paid property tax on his beachfront home out west or his commercial building in Palmdale for two decades. The bill amounted to well over $100,000 and cannot be attributed to recent hard times.

But Lightbourne, an accountant, continues in his well-paid job as the government’s tax consultant, benefitting from the prime minister’s protection. One of his chief roles is to get others to pay more taxes.

Clearly, Lightbourne is not alone. The Tribune has reported official figures showing about $392 million in uncollected property taxes on the government’s books - plus another $166 million in penalties. Only 70 per cent of taxable properties are being billed, and the compliance rate for those that are is no more than 40 per cent.

After the Lightbourne disclosures, government MP Leslie Miller said he, too, owed taxes. And before the general election, it was Miller (now chairman of the Bahamas Electricity Corporation) who admitted he did not pay his utility bills either. For good measure, Miller added that politicians should not be required to disclose their tax status.

More recently, the Guardian confirmed that Miller’s companies owed BEC almost a quarter million dollars - something that had been reported when he was made chairman two years ago. So far Miller has refused to step down, and the prime minister has had nothing to say on the matter.

Plainly, you can’t be running a public corporation and condemning others for not playing by the rules while you do as you please. Well, you can if you are Alice in Wonderland. And as if to confirm his location, Miller reacted to the disclosures about his bad debt by saying the media was out to “destroy black people" and return them "to servitude."

Last week, Miller’s family paid BEC $100,000 in cash on their outstanding bill. This was unusual in itself, since Miller has always claimed his businesses are in financial difficulty, yet magically he could produce a hundred grand in cash and plonk it on BEC counters.

This opens as many questions as it answers, because cash transactions over $10,000 are supposed to be subject to regulatory scrutiny.

And presumably, the Millers will be able to simply draw down on this $100,000 deposit as their $35,000 per month BEC bill continues to rise, so we have to question whether any money has actually changed hands.

The latest disclosure was that Dame Marguerite Pindling, widow of the prime minister who enacted the property tax legislation in 1969, owes more than $300,000 in taxes on her multi-million-dollar Skyline Drive mansion - dating back at least 14 years - despite continuously receiving her husband’s pension of $86,000 per annum.

No-one in the Pindling family would comment on this, but the prime minister said he would review the situation before considering Dame Marguerite as the next governor-general. He then promptly swore her in as deputy governor-general.

Social media sites exploded last week with emotional commentary on these sensational revelations.

One well-placed PLP operative said the press was involved in a conspiracy to “undermine the PLP government - make no mistake.”

Others agreed: "the FNM went out and invested good money to own the media houses and then hand-picked their personalities who are in a position to feel comfortable so they do what they know they are expected to do.”

Others said Lady Pindling was entitled to a free ride: "I feel embarrassed that we are asking her to pay a tax that has been on the books since Sir LOP passed. I say write it off and put her on the hill.”

Others believed no one should be held to account unless everyone was: "If folks are going on a feeding frenzy for one person, then shame all devils so that people will see that this is not isolated and most persons who are griping the most are probably the biggest perpetrators.”

And there were the usual attacks on the whistleblowers rather than the miscreants themselves: "Leaking customer information is a crime in this country. Someone needs to go to jail and this political melee by the press will cease in a hurry."

It would be laughable if it wasn’t so serious. And it is serious because free-riding and immunity for tax cheats undermines democracy and the rule of law.

Successful development requires an effective tax system. In 2005, the average tax revenue to GDP ratio in the developed world was approximately 35 per cent, but in developing countries it was only 15 per cent. In the Bahamas it’s about 18 per cent today.

The government and its international advisors want to raise this percentage to well over 20 per cent to help staunch the debt spiral and fund national development. But widespread tax evasion over decades suggests there is no real political consensus for improving governance in this regard.

According to the 18th century Scottish economist and philosopher Adam Smith, “the subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.”

In other words, we can only have an effective state can when the élites are willing to pay taxes to authorities that are perceived to be legitimate and competent. If elites are not prepared to pay and free-riding has no consequences, then balanced development will be impossible to achieve.

As one international tax expert put it, "The root cause of weaknesses in tax systems in developing countries is ultimately not poor tax policy or capacity constraints in tax administrations, but the lack of political agreement among those with power and influence (the ‘élites’) to make taxation effective."

The bottom line is that there must be a political consensus on the need to pay taxes at the level that is required to fund an effective state. This requires acceptance of a long-term vision of national purpose, and being willing to pay to deliver that vision.

Free riding by prominent members of the elite indicates that no such consensus exists in the Bahamas today. Immunity from taxation and other obligations - the lack of any consequences for non-payment - is clear evidence of poor governance.

Tax reforms will not work without broad political support. In a democracy it is ultimately self-defeating to let some folks continue in the belief that they, unlike regular citizens, do not have to play by the rules. Equity in tax collection and other obligations is a must.

There is no suggestion here that those individuals who have been exposed in the news recently are the only tax cheats in the Bahamas. But we should all insist on swift action to address the issue comprehensively and effectively.

According to the OECD, trust in government "is undermined by a lack of transparency around tax collection, tax compliance and the use of tax revenue. There is reason to believe that improving transparency could improve tax compliance."

Hopefully, the process of tax reform that we are currently engaged in will stimulate the government to be more accountable to civil society. This in turn will help the government to build a more effective and democratic state.

Here’s the bargain in a nutshell—as citizens we will accept and comply with taxes in exchange for government providing effective services, the rule of law, and accountability.

The Leslie Miller attitude of “rank arrogance" (as the Guardian put it) just doesn't play any more. But so far, the government has not shown that it has received this message loud and clear.